Preparing for retirement in the modern age

Jean Tsou, 35, enjoys her career as a research-and-development engineer for a medical-equipment maker in the Seattle area. Other than the mortgage on the 1928 home she shares with her longtime boyfriend, she has no debt.

(Digital Vision, Getty Images)

Jean Tsou, 35, enjoys her career as a research-and-development engineer for a medical-equipment maker in the Seattle area. Other than the mortgage on the 1928 home she shares with her longtime boyfriend, she has no debt.

“I don’t live above my means,” she says.

And yet, despite eight years of making the maximum investment in her 401(k), investing in stocks, setting aside cash, and this year launching a Roth IRA, she wonders if her financial picture might need re-engineering. Born to a family of savers, she wonders this: Is she saving enough?

“I want to make sure I’m going to be OK in retirement,” she says. “People don’t think about how long they’ll live. What if I live to be 90?”

For an expert opinion, she completed an online survey to participate in a free financial makeover from a member of a local chapter the Financial Planning Association.

She was paired with Lee Martin, a certified financial planner.

Tsou has saved more than $540,000 in a mix of cash and CDs, stocks and funds at multiple brokerages, and retirement accounts. Factoring in her mortgage balance and home’s estimated $401,000 value, her net worth is currently about $740,000.

“She’s way ahead of the curve for someone her age,” Martin says of her portfolio. “She’s got a genetic disposition to save.”

By living frugally, setting aside anywhere from $400 to $700 each month from her six-figure annual salary, and paying extra principal each month toward her 30-year mortgage (which she’s on track to pay off at 50), Tsou has a sizable nest egg to help prepare her for retirement.

Tsou has invested about $145,000 in cash and CDs and about $203,500 in stocks via multiple self-managed brokerage accounts.

For eight years she has made the maximum contribution possible into her employer’s 401(k), which is employer matched, and now has slightly over $194,000 there. She has begun contributing to a Roth IRA, and has just over $3,000 there.

Looking at her asset mix, Martin said he was struck by how liquid her portfolio is, which is unusual for a person her age.

Her cash savings and CDs are accessible in the event of emergency, and the stocks and funds she owns in brokerage accounts can also be sold in relatively short order if the need arises.

Tsou has more than 40 percent of her assets in cash, Martin notes, yet with expectations that she will remain in a secure job with a stable income she could reduce this percentage to the 10 to 15 percent range.

Martin suggested that for simplicity’s sake and to lower management fees, she shorten the list of brokerages where she trades equities, and then, with respect to allocation, that she consider moving more of her investments into large-cap stocks or funds representative of her high risk tolerance.

Using historical data as a basis for his estimates, Martin forecasts that by shifting her portfolio into a slightly more aggressive allocation, she could achieve a ballpark 8 percent annual return versus the 6 percent return estimated for her current investments.

Because Tsou has a substantial and growing mix of assets invested in taxable stocks and mutual funds, she may want to consider investigating whether she can move some of her money into similar stocks and funds that will create lower tax impacts, Martin says.

While this isn’t an issue on Tsou’s tax returns now, if capital-gains tax rates rise over time, she could face increased tax liability in the future.

For that reason, Tsou would be wise to continue building her balance in her Roth IRA, which will allow her to withdraw money tax free in retirement.

Additionally, Martin recommends that she investigate municipal bonds, municipal bond funds, or tax-efficient mutual funds, which can help offset taxes.

“I recommend against people specifically planning around tax issues,” Martin says. “But in Jean’s case, this may need to become part of year-end tax planning as time goes by.”

If tax impacts are a concern, he notes, investors may want to house dividend-paying stocks or equities in IRA accounts and stocks and equities that don’t pay dividends into taxable accounts.

Tsou said she was relieved to learn she could retire at 65 if she wants to — and that spending more money on living expenses or leisure than she now does might also create some tax advantages.

Indeed, Martin says, she could possibly retire at 50.

As time passes, she will want to make sure to complete her will and to consider an estate plan that reflects her desire to provide for her significant other and family, but for now she needs to maintain the good savings habit, Martin says.